Over the past 5 years its only gotten more difficult for first time buyers in Canada to enter the housing market. Prices have mostly been creeping up, multiple offer bids often make the buying process stressful, and mortgage rate stress test rules certainly aren’t helping.
So will the Federal Governments recently announced First Time Home Buyers Incentive help ease some of this burden? The Federal government certainly thinks so. But let’s try and form our own decision here by looking at the pros and cons of the new incentives.
Adds an extra $10,000 in First Time Buyer RRSP funding towards down payment – from $25,000 to $35,000 per applicant. This could help provide a few thousand dollars extra in up front tax incentives. A very helpful boost when starting a new home.
For new homes, up to 10% interest free mortgage loan for as long as the home is owned. For resale homes, up to 5% interest free mortgage loan (most homes sold fall into this category). This could potentially boost purchase prices if the buyers purchasing powers is boosted by 5% – 10% accordingly – allowing more buyers access into the market.
Interest savings. The government mortgage loan incentive could easily save the buyer thousands of dollars in mortgage interest over the years. For example, a $500,000 home would be more affordable with the mortgage incentive than a $500,000 home purchased without the added mortgage incentive.
The buyer loses an equity interest in their home, equivalent to the % of interest free mortgage loan granted. So, if the buyer opted for a 5% interest free government mortgage, the government would own 5% of the equity in the home. So, when values increase– the home owner would gain 95% of the benefit. When the house is sold – the government loan would have to be repaid, PLUS the increase in equity based on 5% of the home value.
$120,000 income cap. If the family income is over $120,000, then the first time buyers would not qualify.
The First Time Buyer Incentive may result in LOWER affordability. One limitation of this program is that the buyer can not qualify for a mortgage that is more than 4 times their income. However, our calculations consistently show that first time buyers can qualify for mortgages of 4.5 to 4.6% of their incomes – even with the stress test in place. So there could very well be a 15% reduction affordability if this program is opted for.
In conclusion, it is definitely interesting that first time buyers could be granted free government money. After all, as mortgage brokers – helping customers pay less interest is what we live and breathe each day.
However, if the customer is sacrificing equity in their home, there could potentially be a net loss on home ownership investment here if market growth surpasses the interest rate. Also, if the first time affordability really is lowered from 4.6 times income to 4 times income, as the current math is showing, then we may either see a redevelopment of the incentive program or less than expected use of the program. It will be worth keeping an eye on the evolution of this first time home buyer incentive – since it is not supposed to launch until August 2019.